<

Investing in Disney: A comprehensive primer and analysis

Part 6
Investing in Disney: A comprehensive primer and analysis (Part 6 of 11)

Could acquisitions revive Disney’s Studio Entertainment business?

Disney’s acquisitions

Disney’s acquisition strategy is in line with its objective to achieve creative excellence and grow its brands and businesses around the world. It said that its acquisitions of Pixar, Marvel, and Lucasfilm in the last decade have proven its unique ability to nurture strong brands and expand creative content to its fullest potential and maximum value.

DIS top 20Enlarge Graph

The acquisition of the Steve Jobs–led Pixar Animation Studios at a valuation of $7.4 billion in 2006 reinvigorated Disney’s animation division, because of which it’s seeing a tremendous creative resurgence. Ever since the debut of Mickey Mouse in Steamboat Willie, animation has been the bedrock of Disney, so the acquisition of Pixar furthers the company’s commitment to outstanding animation, embracing its heritage and securing its legacy for the future. Some of the successful movies from Pixar include Cars, Toy Story, Finding Nemo, The Incredibles, Ratatouille, WALL-E, Up, and Brave.

According to news reports, the acquisition of Pixar in 2006 was crucial for Disney, as its own animation and studio business was struggling at that time. Disney’s profitable co-production and distribution deal with Pixar was facing issues due to a clash between Pixar’s then-chief executive Steve Jobs and Disney CEO Michael Eisner. Allowing Pixar to fall into a rival’s hands only would have further weakened Disney’s position. So Disney is supposed to have paid over the odds at an estimated 45 times earnings when the deal was announced.

With Marvel’s acquisition in 2009, a strong global brand and world-renowned library of characters including Iron Man, Spider-Man, the X-Men, Captain America, the Fantastic Four, and Thor was combined with Disney’s creative skills, global portfolio of entertainment properties, and business structure that maximizes the value of creative properties across multiple platforms and territories.

The box office success of The Avengers and Iron Man 3 silenced all the critics who were pessimistic about the Marvel acquisition because they considered it overpriced. Disney is also expected to benefit by pushing the Marvel brand in its theme parks, TV channel, cruise lines, and merchandising segments. The Avengers and the Marvel Comics characters are expected to drive licensing and theme park revenue (Disney’s upcoming Shanghai Park is expected to have a Marvel-centric attraction). Disney expects the addition of Marvel brands to provide the company with significant long-term growth and value creation.

The acquisition of Lucasfilm in 2012 followed the successful acquisitions of Pixar and Marvel, which showed the company’s unique ability to fully develop and expand the financial potential of high-quality creative content with compelling characters and storytelling through the application of innovative technology and multi-platform distribution globally. It believed that adding Lucasfilm to its portfolio of renowned brands significantly enhanced its ability to serve consumers with a broad variety of the world’s highest-quality content and to create additional long-term value for its shareholders.

After Disney acquired Lucasfilm and LucasArts for $4.05 billion, it decided to shut down its gaming division, LucasArts. It said it had decided to shift LucasArts from an internal development to a licensing model, minimizing the company’s risk while achieving a broader portfolio of quality Star Wars games. According to news reports, around 150 people were laid off.

The company stated it will release the next Star Wars: Episode VII on December 18, 2015, under the Lucasfilm banner. The Star Wars franchise is expected to generate robust profit growth for Disney, as the company has more feature films planned—along with television programming, games and merchandise, and an expanded Star Wars presence in its theme parks around the world. Disney also recently announced that Lucasfilm and Marvel Entertainment are joining forces to bring new Star Wars adventures, with Marvel granting exclusive rights to create and publish Star Wars comics and graphic novels beginning in 2015.

Disney stated that in 2013, Marvel’s Iron Man 3 grossed $1.215 billion worldwide while Marvel’s Thor: The Dark World grossed $621.2 million. Pixar continued its run of success with Monsters University, with worldwide returns of $744.9 million, while Disney’s Oz: The Great and Powerful earned $493.3 million worldwide. Frozen, Walt Disney Animation Studios’ latest feature film, crossed $500 million at the worldwide box office as of December 30, as well as the $250 million mark both domestically and internationally. Frozen has set the record for the largest Thanksgiving debut in history and is the largest opening ever for a Walt Disney Animation Studios film.

Netflix deal

On November 7, 2013, Disney and Netflix announced a deal in which Marvel TV in association with ABC Television Studios will develop four serialized programs featuring some of the Marvel’s popular characters—Daredevil, Jessica Johns, Iron Fist, and Luke Cage. This original program will run over multiple years and lead to a Marvel’s The Defenders mini-series event that re-imagines a dream team of heroic characters. The new TV deal follows 2012’s movie distribution deal with Netflix, through which, beginning with 2016 theatrically released feature films, Netflix will be the exclusive U.S. subscription television service for first-run, live-action, and animated movies from Walt Disney Studios, including titles from Disney, Walt Disney Animation Studios, Pixar Animation Studios, Marvel Studios, Disneynature, and Lucasfilm.

To learn more about Disney’s value and its segments, see Must-know: Can Disney extend its impressive returns?

The Realist Discussions